Tuesday, February 27, 2007

The Market Today

The market losses today may be traumatic for many investors (DOW down 3.29%, S&P down 3.47%, NASDAQ down 3.86%).

However they can be used to demonstrate the importance of proper diversification. The 401K investor who placed all of their funds in to a foreign stock fund such as (FIGRX down 4.27%) is looking pretty glum this evening. The losses are even more dramatic for investors who placed all of their funds into emerging stock markets such as China (FXI down 9.87%) or Latin America (ILF down 8.39%).

However if a 41 year old investor followed the diversification strategy outlined in the earlier 401K article from February 6th then they are considerably more chipper tonight (but not quite reaching for the champagne). Using the moderate allocation strategy, this investor would only have incurred a loss of 2.21% in their portfolio today. Most of the indexes were down considerably more then this.

The investor’s portfolio using a moderate allocation consists of the following funds which performed as follows:

FIGRX down 4.27% (10% of portfolio)
FUSVX down 3.48% (25% of portfolio)
PEXMX down 3.34% (20% of portfolio)
SSMVX down 3.52% (10% of portfolio)
FBNDX up 0.41% (25% of portfolio)
FMPXX up 0.014% (10% of portfolio).

By using a proper allocation strategic they endured a single day loss that was significantly less then most indexes suffered in the market today. Over a long period of time, this investor will have risk adjusted returns that outperform the overall market from a portfolio return/beta perspective.